$ETN · Everything Money · 2026-10-28

Guys , the third company is Eaton, from Cleveland. Its headquarters are located 12 minutes from my home. It manufactures the electrical equipment and now the liquid cooling systems that power and cool these massive data centers.

Optimistic outlook: Artificial intelligence is riding a massive wave of electrification. Therefore, Eaton can win regardless of which AI company ultimately comes out on top . In a pessimistic scenario, data center forecasts may be overly optimistic .

Eaton took on a lot of debt for a large acquisition deal, although that deal added valuable cooling technology to data centers.

So, folks, the market capitalization is $144 billion, and the value of the company is $179 billion . This means $36 billion of total debt. Guys, they only made $3.6 billion in free cash flow last year.

That's a 10 to 1 ratio. I do n't like that. That's a lot of debt for a company, when its debt is $36 billion, while it generated only $3.6 billion in free cash flow last year. Over a period of 5 years, the average annual flow is only $2.7 billion.

Returns on capital are not the best. Not very good. So, we already have two big problems. Firstly, they have a lot of debt. Secondly, they don't even get a high return on the money invested in this business.

Therefore, at some point, change is bound to happen.

And now, folks, their profit margin is almost fixed, very stable , between 12 and 13%. Now, something interesting is that their revenue growth is increasing. 4% annually over the past ten years, 9.5% annually in the past five years , and nearly 11% annually in the last three years.

I wonder how much of this growth is driven by the artificial intelligence boom. And guys, on top of all that debt, dividends consume almost half of their free cash flow. So, this makes me feel a little uneasy about this company.

Low returns on capital. I now wonder why a checkmark was placed here in front of long-term debt despite the low free cash flow, and despite the fact that they have a lot of debt.

Let's check that out , because I'm wondering how much of their balance sheet is money they owe to others for jobs they haven't completed yet. So, guys, the interesting part here is that a lot of their debt is current liabilities.

The good news is that it is valued at only $12 billion, which seems like a large sum, but current assets amount to $14.77 billion. Therefore, they have enough cash and current assets to pay their current obligations.

I think I understand why there's still a checkmark , but it's still a significant amount of debt anyway, even if it's equivalent to 4.76 times their long-term obligations. The question is, can they increase their profits sufficiently while they are consuming so much of their cash in paying dividends?

Well, analysts expect earnings to grow from $13.50 per share to $24 over the next four years. This is very large growth , exceeding double digits annually, but revenues appear to be reaching their ceiling of 33 billion to 44 billion .

I think my confusion stems from how their profits can grow so much while their gross profit margin is so low, and their revenues are not growing as much as their profits...it does n't make sense to me.

So, this is where I get a little confused about this company.

Now, folks, here's my 10-year analysis of Eaton. Guys, I know revenue growth is accelerating. I observe it and wonder how much of it is due to artificial intelligence. So , what I'm going to do is ask our artificial intelligence, how much of Eaton's revenue growth over the past three years has been attributable to artificial intelligence.

So, what I'm going to do is ask our artificial intelligence, how much of Eaton's revenue growth over the past three years has been attributable to artificial intelligence. There is not enough publicly available information to calculate an accurate share of Eaton's 3-year revenue growth that can be attributed specifically to artificial intelligence.

Eaton reports on demand for data centers, but does not consistently separate AI-related sales from traditional cloud computing data centers. Okay, this makes me wonder: Okay, what is their data center share?

So, guys, it's a mystery. Now, I wonder why it is vague, because if it is vague, it means that it has not been disclosed by Eaton herself. So I wonder, why would Eaton not want to disclose that information?

There are two reasons, and they are very different from each other.

The first is that they are a very large company even without data centers, which is probably perfectly normal. Or secondly, data centers are such a big factor for them that they don't want to scare people with that.

My view is that when you see such a large rate of growth in revenue over the past five years, and in line with cloud computing becoming a huge phenomenon, I can't assume that this will continue for much longer.

Therefore, I chose a slightly more conservative approach. I have chosen 4%, 7% and 10% for revenue growth over the next ten years. Next, profit margin and free cash flow. The profit margin tends to be higher. I will put 11%, 11.5% and 12%.

Guys, I'm actually going to focus on free cash flow. So I will put zeros in my profit margin. Don't worry, he will still give me the numbers I need. Next, what is the price-to-earnings ratio or price-to-free cash flow that I will allocate to this company 10 years from now?

Well, guys, I don't think this is an amazing business. Low return on capital. Yes, they are improving, but I am not comfortable allocating a large multiplier to it.

They also have a small amount of debt. Yes, it's no longer an "X" mark on our pillars, but it's still a significant debt for the company, and I don't like that cash distribution.

Therefore, I set 13, 16, and 19 times the free cash flow. It's still around the average for the stock market, but nothing exceeding expectations. And of course, the 9.5 percent target I want to achieve without a safety margin.

Here we focus on free cash flow. We have a low price at 125, a high price at 269, and an average price at 180. Guys, based on today's current price, sorry Cleveland, that's a current yield that's roughly equivalent to the breakeven point over the next 10 years if my average assumptions hold true.